Using the Websitehttp://www.option-price.com/index.php, determine the appropriate value or price of...

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Using the Websitehttp://www.option-price.com/index.php, determine the appropriate value or price of an option under the following conditions (use “3” the “rounding” parameter”):

Exercise price $90
Underlying stock price $90
Time between option expiration and today 30 days
Standard deviation of stocks returns 10%
Marketplace interest rates or avg. rate of return 8%
Dividend yield 5%

How would the price of this option change if the expiration date were 85 days from now, vs. 30 days?

Why does this difference (between 1 and 2) make sense?

Make up an example of a company in an industry and the conditions in the marketplace which might cause you to buy a “put option” for company A, in industry B stock…vs. a “call option” on some other company X in industry Y.

Robert · Accepted Answer

Part 1 – Calculation of option price 
The variables taken for calculating the price of the option are as follows: 
Exercise Price = $90 
Underlying stock price = $90 
Time to option expiration = 30 days 
Volatility = 10% 
Interest Rates = 8% 
Dividend Yield = 5% 
The theoretical price of call option with following parameters = 1.138 
The theoretical price of put option with following parameters = 0.917 
Time to expiration = 85 days 
The theoretical price of call option with 85 days expiration = 2.034 
The theoretical price of put option with 85 days expiration = 1.415 
The price of both call and put options are higher in with 85 days to expiration. So, the 
price of an option increase as there are more days to expiration. This is because of the probability 
of the market behaving in a particular way increases as there is more time to expiration of the 
option. So, the risk to investor is comparatively less is 85 days expiration which thereby 
increases the price of the options (Coelen, 2002).  
Part 2 – Call Vs Put Option 
1. Put Option: Suppose that Technology Industry is currently at a high however it is speculated 
to fall over the next two months.

Using the Website http://www.option-price.com/index.php , determine the appropriate value or price of an option under the following conditions (use “3” the “rounding” parameter”): Exercise price $90...

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